IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business
Spot is ₹80 per US dollar. Indian inflation is expected to be 6% a year and US inflation 2% a year. Under relative purchasing power parity, which is the approximate one-year forward-looking expected rate, to the nearest rupee-paisa?
Relative purchasing power parity scales the spot rate by the ratio of domestic to foreign inflation: 80 × 1.06 ÷ 1.02 gives about ₹83.14 per dollar, a depreciation of the rupee reflecting India's higher inflation.
- A₹83.14 per dollarCorrect
- B₹76.92 per dollar
- C₹80.00 per dollar
- D₹84.80 per dollar
- ₹86.40 per dollar
Explanation
Expected rate = 80 × 1.06 / 1.02 = 80 × 1.039216 = 83.14. Option ₹76.92 inverts the ratio (wrong direction). ₹84.80 applies 80×1.06 ignoring US inflation. ₹80 ignores inflation differences.
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